Hertz (HTZ) – Pending Delisting – Upside 50% (very risky)

Current Price: $1.50

Target Price: $0.75 (ultimatelly a $0.00)

Upside: 50%

Expected date: Q3 2020

 

The key thesis is that pending delisting of bankrupt HTZ stock should result in a steep sell-off after many retail holders will be forced to close their positions. Robinhood alone shows 155k HTZ holders and the broker does not allow to trade in delisted OTC stocks.

The equity of a Hertz is pretty much worthless, while the hype from retail investors is keeping it alive (above $1/share) for now. The company has already received a delisting notice on the 22nd of May and went for an appeal. Nonetheless, given the current position of the company and the already failed equity raise, it is very likely that the appeal will get rejected. The hearing should be held shortly - the exact day is not clear yet, however, the review date is usually set from the 25th day since the initial notice.

When I just started looking into this situation, HTZ seemed to be an interesting short candidate even with very expensive borrow (250%/year) due to pending delisting catalysts and the sharp sell-off this would generate. HTZ share price was also significantly higher at the end of last week. However, the stock is very volatile and there is a non-zero possibility that the share price could get hyped up again (went from $1/share to $6/share at the beginning of June) or stock will be suspended from trading forcing short-sellers to pay exorbitant borrow fees for a prolonged period. Therefore, I am mostly posting this as a case study on an overhyped bankrupt stock facing delisting rather than an actual short selling idea.

 

Hertz

Hertz is one of the most recognizable brands worldwide in the car rental industry. The company provides car rental services and has 12,400 locations in over 160 countries (including franchises). Already burdened by the fierce competition in the sector and emergence of industry-disrupting car-sharing companies (Lyft, Uber, etc.), HTZ has been hit severely by the COVID-19 outbreak this year, which resulted in over 90% share price drop since the level traded in February.

On the 22nd of May HTZ filed for bankruptcy and so far it seems that any kind of recovery is very unlikely:

  • As of Q1'20 the company had $24.3bn of liabilities and only $1.5bn of equity (not including the bankruptcy fees and other fees, which are often very substantial).
  • Its secured debt is trading at around 76 cents to a dollar, while unsecured notes are trading at around 30 cents to a dollar. This definitely shows that the chances of any recovery for equity are non-existent here (investors do not even expect the debt to receive full recovery).
  • At the end of May'20 ex-largest shareholder, Carl Icahn sold his 39% stake at $0.72/share ($2bn loss) and while HTZ management has been trying to pose a fighter stance pretending that everything will eventually turn out well, apparently they've also been unloading shares in the recent short rally caused by retail investors.
  • The $1bn equity raise announced last week was suspended after the investigation from SEC. The prospectus clearly stated that:

Consequently, there is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.

So overall, I think that the consensus here is rather clear - the equity of HTZ is worth $0.

 

Swarm of new retail investors

After the announcement of bankruptcy and initial fall to $0.40/share, in just 2 weeks HTZ skyrocketed 15x to $6/share as retail shareholders have piled up following an "invest in bankrupt, but still listed stocks" trend.

htz

Of course, this did not last long and HTZ has now fallen to mid $1/share levels again. What is interesting, however, that apparently retail investors are still holding (the bag) here. Robintrack data shows that since the fall from $6/share levels the amount of Robinhood accounts that own HTZ has remained relatively unchanged so far (which likely explains why HTZ share price is still over $1/share levels):

robintrack

 

 

Delisting will happen despite the appeal

So currently there are 155k Robinhood accounts that own Hertz. The important point to consider here is that HTZ trades on NYSE and as the exchange rules do not allow bankrupt stocks to remain listed (Manual Section 802.01D), the stock is likely to move to OTC markets soon. This alone will cause a huge sell-0ff as retail traders will be forced to close their positions because apparently Robinhood (and likely other popular brokers) do not allow their clients to trade delisted OTC stocks.

NYSE has already provided a delisting notice on the 26th of May, which was subsequently appealed by HTZ.

Delisting procedure is the following - after the notice is received the company has 10 days to appeal the decision. If it chooses not to - the delisting happens very swiftly (usually up to two weeks after the initial notice). Nonetheless, if the company chooses to go for a hearing - the commission will set a review date (according to their schedule) no earlier than the 25th day after the initial notice.

Normally the chances of appeal going in favor of the company are very slim for all types of involuntary delistings - so it is quite rare for a company to chose the appeal path. For Chapter 11 delistings it is almost unprecedented for a company to questions the decision of the stock exchange - even after initially communicating intentions to appeal, most firms usually give up without a fight (e.g. Erin Energy).

In fact, I've been able to find only one instance where a company in bankruptcy asks for a hearing to challenge the delisting - oilfield service giant Weatherford (ticker: WFTLF). The company ran an aggressive expansion through acquisition strategy (financed with debt), so when the oil price crashed at the end of 2018, Weatherford went bust. In May'19 NYSE suspended trading in its shares and issued notice re delisting, however, Weatherford appealed the decision and went on to trade on OTC markets (main exchange suspension stays until the decision on appeal is made). Weatherford then emerged from bankruptcy in Dec'19, however, NYSE shares remained suspended until the April'20, when the company announced voluntary delisting and withdrawal of the appeal. So the policy of NYSE is quite strict and there are no such cases yet when a bankrupt company would be allowed to trade for a prolonged period of time.

It is interesting, however, that HTZ shares were not suspended like Weatherford's. Apparently, this is because Hertz violated only the "Chapter 11 filing" rule, while Weatherford has on top of that broken the "abnormally low" pricing rule (likely because it traded below $1/share levels). From NYSE manual:

However, if a company that is below any continued listing standard enumerated in Para. 802.01B above (which may be determined on the basis of price indications) files or announces an intent to file for relief under any provisions of any bankruptcy laws, it is subject to immediate suspension and delisting. Similarly, if a company that files or announces an intent to file for relief under any provisions of any bankruptcy laws subsequently falls below any continued listing standard enumerated in Para. 802.01B above (which may be determined on the basis of price indications, it is subject to immediate suspension and delisting.

Therefore, if HTZ falls below $1/share at any time before the appeal decision, it seems that its shares should end up being suspended, which will serve as a catalyst for the sell-off as well.

Regarding the eventual appeal decision, it seems that there is very little chance this could end up in HTZ favor. In order to stop the delisting, a company should be in good financial health and have a clear, detailed plan on how it will regain compliance. From NYSE manual:

Notwithstanding the foregoing, in the event that such company is profitable (or has positive cash flow), or is demonstrably in sound financial health despite the bankruptcy proceedings, the Exchange may evaluate and accept a Plan submitted under the procedures of 802.02 and 802.03.

In contrast, HTZ is definitely not profitable (hardly was even before COVID-19) and there is little chance that they could come up with anything worthy to show NYSE at this point. In fact, it's likely that the whole appeal process was aimed to drag the time for an equity raise, but as that has already failed, I wouldn't be surprised if the company eventually withdraws its appeal as it happened for most of the other cases.

 

Very risky

Finally, we do not have a position in HTZ. This is a research note and not a trade recommendation. Before entering any kind of position relating to HTZ, consider that this stock traded at $15+ before covid and therefore shorting it at $1.5/share might end up disastrously (loss of x times amount of capital invested) if shares start recovering for one reason or another.

10 COMMENTS

  1. g4734g

    Thanks for the writeup…..I have been looking at buying the Jan 2022 50 cent puts. If you could buy at 35-40 cents and monetize at 50 cents, obviously a healthy return….especially if you end up being able to exercise long prior to Jan 2022…..Two concerns: does this drag on for a couple of years and HTZ maintains a 25 to 50 cent value over that period……and secondly what problems might you encounter trying monetize…….would there be an active options market? would you have to actually exercise to monetize, and in that case seems things could dicey, especially since you are not exercising the put to sell stock you don’t currently own…….perhaps others on the board have wisdom or experience on similar deals?

  2. Walter

    WLL went bankrupt months ago and is still listed on the NYSE. And it traded down to 25c and was under a dollar for a while. So I’m not sure NYSE is as strict as you think – they do have some discretion. WLL equity is also getting a very small recovery so that probably helps.

    g4734g – when stocks get delisted, options become closing-only, meaning people can’t buy or sell to open new positions, only close them. So they become very illiquid and you might need to exercise to get out. But that’s not a huge problem because you can just buy the stock and exercise.

    1. Ilja

      Walter, thank you for the input. It seems I’ve somehow completely missed WLL. Will take a look at it. Nonetheless, what is your take on the eventual outcome for HTZ?

      1. Walter

        I think it will be delisted eventually but I’m not sure on the timing. It’s a unique situation with their equity raise and the SEC involved and the fact that the market cap is still $300 million and the stock price well above $1. Need to be pretty confident to put a bet on with borrow cost above 200% and option IVs in the 300-400s. And it’s really crowded resulting in nonsense moves like today’s +100% for no apparent reason. I’m watching for now.

  3. g4734g

    Right but in owning a put I would not be buying the stock I would be selling stock that I don’t own. ie entering into a short position on a security which who knows with the borrower rate would be at that given time. Even though the strategy would be to cover quickly, Hopefully at a profit without incurring significant borrow fees.

    1. Walter

      You can buy the stock first, then exercise your puts. Then you’ll be flat without ever having a short position.

  4. Michael Lax

    Spiked on today on speculation that other car rental companies will buy up the cars. Still might not be enough to help shareholders.

    1. Found this on Zacks

      Each exchange has an appeals process for delisting. The NYSE has a 25-day review period to consider all of the company’s finances and plans for growth. The exchange General Counsel will make a final decision on the delisting at the end of the review period. The General Counsel then immediately informs the company in writing of his or her decision

  5. Ilja

    For the last several months HTZ shares were slowly deteriorating and by the middle of this month actually got quite close to dropping below $1/share. Then at the end of last week couple of events caused HTZ shares to skyrocket +143% on a $2.5bn volume (for a bankrupt stock!):
    – On the 16th of October, HTZ announced a new $1.65bn DIP (debtor in possession) financing. It seems that the market (or overly excited retail crowds) views this as an extremely positive sign indicating that HTZ is still able to raise money and will come out of bankruptcy soon. However, I think that equity still remains pretty much worthless here, while the timeline of the whole process is even more questionable now. The company continues to intensively burn cash (in August alone $84m cash was burned in operations) and the size of the new DIP indicates that the trend is not going to stop soon. Initially, at the time of the bankruptcy announcement, the company intended to raise $1bn equity, while DIP seemed not to be in the cards at all. September DIP overview filings show estimated DIP sizing at $1.1bn – $1.5bn, while the recently announced deal is substantially larger than this range. Back in August (Q2 report) the company stated that “there is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless”, and this current financing pushes shareholders even further down in the seniority ranking. Regarding the timing, it seems that DIP lenders do not expect the bankruptcy process will be rather extended: “The DIP Facility matures on December 31, 2021, and has limited covenants and events of default, including one milestone requiring the filing of a Chapter 11 Plan by August 1, 2021.”
    – Apparently, the delisting hearing with NYSE was supposed to take place on the 15th of October, however, no updates were issued and so far HTZ remains listed. It seems that the market has understood this as a sign that HTZ will not get delisted. I don’t think the assumption is correct and we still should wait for the actual update from the exchange. The newly received loan gives the company more flexibility and survival time, however, it still doesn’t put HTZ in “sound financial health”, which is one of the requirements to regain compliance with the listing requirements.

    Overall, it is hard to explain the almost 2.5x equity valuation increase on Friday. It was likely a combination of hype pumping, short-squeeze, and algo-trading. This remains to be an interesting case to track (definitely not investable neither on the long nor short sides though).

    Monthly operating report for August https://restructuring.primeclerk.com/hertz/Home-DownloadPDF?id1=MTA4MzI0OQ==&id2=0
    MOR July https://restructuring.primeclerk.com/hertz/Home-DownloadPDF?id1=MTA3MDc5Ng==&id2=0
    DIP overview September https://www.sec.gov/Archives/edgar/data/47129/000165785320000093/cleansingmaterialscombin.htm
    DIP Materials October https://restructuring.primeclerk.com/hertz/Home-DownloadPDF?id1=MTA5ODk4NQ==&id2=0

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